Friday, April 4, 2008

Over the next couple of years, many banks will fail and be taken over by the government or larger institutions. This will be an agonizing process that some banks will try to avoid at any cost. I will explain in a multi part series what to watch out for:

There are strict requirements regarding the sale of OREO by Banks in terms of the cash down payment by the buyer. FASB 66 states that:

"The buyer's initial investment shall include only:

(a) cash paid as a down payment.

(b) the buyer's notes supported by irrevocable letters of credit from an independent established lending institution.

(c) payments by the buyer to third parties to reduce existing indebtedness on the property.

(d) other amounts paid by the buyer that are part of the sales value."

Banks cannot lend money to the buyer to finance the purchase of OREO - or as the Comptroller of the Currency has put it:

"The cash down payment requirement of FAS 66 can be satisfied only with the borrower’s personal funds, funds borrowed from an unrelated source, or an irrevocable letter of credit from a third party. This requirement for a cash down payment generally is not met when a bank provides the borrower with an additional loan for working capital or when the borrower’s down payment is obtained by draws on an unrelated line of credit with the bank."